In October 2023, the French Council of State – the highest judicial authority for which focuses on administrative law issues – rendered a critical decision (N° 465761) on the issue of arbitrability of a dispute involving a French public entity. In doing so, the Court revisited a fundamental pillar of international arbitration law established by the Galakis decision issued by the French Court of Cassation more than half a century before (2 May 1966).
The Origins Of The Dispute
The origins of this case date back to 2008. It involves two contracts between Ryanair Designated Activity Company and its subsidiary, Airport Marketing Services Limited, with the Syndicat Mixte des Aéroports de Charente (SMAC – a French public entity), which aimed to establish and promote a regular airline connection between the London-Stansted and the Angoulême airports. Governed by French law, these agreements include an LCIA arbitration clause specifying London as the seat of arbitration.
In February 2010, two years after the execution of the agreements, Ryanair notified SMAC of its intention to unilaterally terminate the route, which also led to the termination the associated marketing contract.
Ryanair and its subsidiary initiated arbitration proceedings, that resulted in a jurisdiction award by the sole arbitrator in July 2011, and then a final award in favour of Ryanair in June 2012, affirming the termination's validity.
Procedural Journey
In April 2013, the French Council of State dismissed SMAC's request to annul the award on the ground that it has no jurisdiction to annul an award issued by a foreign tribunal and declared that only administrative courts had jurisdiction to hear exequatur applications of foreign awards.
Meanwhile, Ryanair's exequatur application made a lengthy journey which has spanned over a decade and travelled through various levels of the French Judicial system:
- the Paris High Court ("Tribunal de Grande Instance") granted exequatur to the final award in May 2012.
- An appeal by SMAC led the Paris Court of Appeal to decline jurisdiction following the Council of State’s 2013 ruling that administrative courts should handle exequatur applications for foreign awards. This decision was rendered in September 2013. The Cour de Cassation quashed this refusal, citing violations of the New York Convention of 1958, and remanded the matter to the Versailles Court of Appeal.
- The Versailles Court of Appeal then referred the matter to the Court of Conflicts ("Tribunal des conflits") who are in charge of deciding which courts, administrative or civil, should have jurisdiction over the case. They confirmed in April 2017, that the administrative courts indeed hold jurisdiction over the annulment and exequatur of arbitral awards in cases involving public contracts.
- Ryanair lodged another exequatur request, this time with the administrative Tribunal of Poitiers, which denied Ryanair's request on December 2020. The Bordeaux Administrative Court of Appeal confirmed the administrative Tribunal of Poitier's ruling in March 2022.
Arbitration is supposed to provide a swift, cost-effective and efficient means of resolving disputes, and one of its main advantages is the ability to reach a final and binding resolution with minimal intervention from state courts or appeals. However, the ten-year-long exequatur process in this case strikes at the very essence of arbitration by compelling the parties to incur substantial costs and consume considerable time despite the partes choice to agree that their disputes should be resolved by arbitration.
The Final Ruling and the Reasoning Adopted By The Council Of State In Ryanair v. SMAC
The Bordeaux Administrative Court of Appeal applied a three-step approach set out in its Fosmax decision of November 9, 2016 and asked:
- Firstly, is the arbitration clause valid? Meaning is the dispute is eligible for resolution through arbitration in accordance with Article 2060 of the French Civil Code[1]?
- Secondly, did the arbitral tribunal follow due process when examining the matter and rendering its award?
- Thirdly, does the award comply with the rules of public policy and mandatory rules of French international law ("lois de police")?
The Court of Appeal of Bordeaux dismissed Ryanair's exequatur request. The involvement of public entities in an international trade contracts does not exempt them from adhering to the general principle in French law, which prohibits them from using arbitration to avoid the jurisdiction of national courts.
Ryanair then applied to annul the Administrative Court of Appeal’s decision. The Council of State upheld the Court of Appeal's refusal to enforce the arbitral awards on several grounds:
Firstly, the Council of State held that the "enforcement of an arbitral award resulting from a contract between a French public legal entity and a foreign entity, executed in France but involving international trade interests, cannot be authorized by the administrative judge if it is contrary to public policy," and went on to say that the "mere fact that a contract was entered into by a public entity for the purposes of international trade does not permit deviation from the principle that public entities are prohibited from resorting to arbitration"
The Council of State further considered that Article V of the New York Convention of 1958 "does not prevent the administrative judge from refusing to enforce an arbitral award rendered to solve a dispute that was not arbitrable."
The Council of State then asserted that the 1961 European Convention on International Commercial Arbitration (called the "Geneva Convention") is applicable only to arbitration agreements concluded between parties whose residence or registered office is in different states that are parties to the Convention, therefore given that Ryanair's office is registered in Ireland (not party to the Geneva Convention), the arbitration agreements fall outside the scope of said Convention.
The Council of State finally concluded that the Administrative Court of Appeal's ruling on the non-arbitrability of an international trade dispute involving a French public entity was correct.
In Ryanair v SMAC, the enforceability of an arbitral award resulting from a contract between a French public legal entity and a foreign entity, executed in France, but involving international trade interests, was rigorously scrutinized by the Council of State under both the "arbitrability" and the "public order" tests.
This case law marks a significant shift from the more arbitration-friendly approach of the Galakis decision which held that public entities may deviate from the general prohibition on using arbitration simply by entering into a contract "for the needs of international trade". The Council of State put an end to this half-a-century-old-exception set by the Court of Cassation and confirmed that arbitration can only be used by a public entity if expressly permitted by a decree, including in the context of international trade.
This ruling is certainly not without criticism:
- French public entities that have willingly agreed to include arbitration clauses in their international trade contracts may, based on this case law, refuse to honour the agreement to arbitrate by challenging arbitration awards that are already rendered.
- Considering that the rulings of the Council of State do not bind civil courts in France, the civil courts would apply the Galakis approach to arbitration clauses in international trade contracts involving foreign public entities. This results in unjustified differential treatment depending on whether the contract with the arbitration clause involves a French public entity or a foreign public entity.
- This case law inevitably weakens the significant efforts made by French civil courts and lawmakers to establish Paris as a major place of international arbitration.
It should, however, be observed that the exceptions to this rule are not uncommon. Article L. 311-6 of the Administrative Justice Code provides a non-exhaustive list of these exceptions in which public entities may resort to arbitration[2]. And, apart from occasional international authorizations, such as the Canterbury Treaty of 12 February 1986 concerning the Channel Tunnel, most exceptions pertain to specific types of entities[3] or contracts[4]. The 2024 Olympic and Paralympic Games are also exceptions to the rule (Article 6 of Law n° 2018-202 of 26 March 2018). Consequently, a number of disputes involving public entities and international commerce interests are still arbitrable.
In any case, companies are advised to carefully consider the implications of arbitration clauses when dealing with French public entities and should consult a French attorney before signing any contract to avoid fruitless exequatur proceedings.
Comparison with the 2022 Athens Airport Case
In the European Union, the position taken by the French Council of State in 2023 is not an isolated one. We can see a growing trend in EU jurisprudence to increasingly scrutinize arbitration involving public entities.
In January 2022, the Hellenic Supreme Administrative Court reached a similar conclusion in case n°246/2022 and ruled that arbitration tribunal lacked jurisdiction over a dispute arising from a 30-year concession contract between the Greek State and a consortium of German companies for the development of the Athens International Airport. The contract was ratified and incorporated into a law enacted by the Greek Parliament (Law n° 2338/1995).
In this matter, the concessionaires commenced an LCIA arbitration against the Greek State, challenging administrative acts imposing VAT charges. The arbitral tribunal issued an award in February 2013, and declared that the acts imposing these VAT charges on the concessionaires had been issued unlawfully.
The concessionaires then applied for annulment of the relevant acts with the Administrative Court of Appeal of Athens. The Court of Appeal annulled the administrative acts on the basis that it was bound by the arbitral award's findings.
The Greek State then applied to annul the Administrative Court of Appeal’s decision on the grounds that it incorrectly construed and applied the principles of the primacy, efficacy, and uniform application of EU law in the field of VAT.
Rather than deeming the dispute as un-arbitrable or contrary to public order, the Supreme Administrative Court applied the European Court of Justice's reasoning in the Achmea (C-284/16) case to the LCIA arbitration clause inserted in the concession agreement. The Supreme Administrative Court found this clause incompatible with EU law, specifically Articles 267 and 344 of the Treaty on the Functioning of the European Union and concluded that the arbitration award was not binding on the administrative courts of Greece before remitting the case to be heard de novo.
By doing so, the Supreme Administrative Court extended the scope of application of the Achmea ruling, originally limited to arbitration proceedings under bilateral investment treaties, to commercial arbitration.
While their reasoning differs, both the Greek Supreme Administrative Court Decision N° 246/2022 and the French Council of State Decision 465761 show a broader trend in European case law towards rigorous examination of arbitration involving public entities.
[1] "We cannot arbitrate on matters of personal status and capacity, divorce and separation issues, or disputes concerning public entities and public institutions, nor in any matters concerning public order.
However, certain categories of public institutions with industrial and commercial characteristics may be authorized by decree to engage in arbitration."
This provision has been incorporated into the French Code of Relations between the Public and the Administration under its article L.432-1: "Except in cases specified by law, notably those mentioned in article L. 311-6 of the Administrative Justice Code, arbitration cannot be used for disputes involving public entities and public institutions, or generally in any matters concerning public order, as stipulated by article 2060 of the Civil Code. However, as provided in the same article, certain categories of public institutions with industrial and commercial characteristics may be authorized by decree to engage in arbitration."
[2] The Council of State has jurisdiction over appeals for the annulment or reformation of decisions made by administrative courts in the following matters:
- Disputes concerning public works contracts;
- Disputes concerning administrative acts of a regulatory nature;
- Disputes concerning decisions on the recruitment, discipline, and career advancement of civil servants appointed by decree of the President of the Republic;
- Disputes concerning the decisions of the authorities vested with regulatory or quasi-regulatory power in the exercise of their powers.
[3] i.e., Former public industrial and commercial establishments such as the SNCF (law no. 82-1153 of December 30, 1982) or La Poste (Article 28 of law no. 90-568 of July 2, 1990).
[4] i.e., Public procurement contracts (law of April 17, 1906, setting the general budget of expenditures and revenues for the 1906 fiscal year, art. 69); Contracts concluded with foreign companies "for the realization of operations of national interest" (law no. 86-972 of August 19, 1986, art. 9).
